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Corporate Parent Not Bound by Forum Selection Clause in Contract Signed by Subsidiary

On July 30, 2019, Justice Sherwood of the New York County Commercial Division issued a decision in Array Biopharma, Inc. v. Astrazeneca PLC, 2019 NY Slip Op. 32345(U), holding that a corporate parent was not bound by a forum selection clause in a contract signed by a subsidiary, explaining:

The General Obligations Law states, in relevant part, that

any person may maintain an action or proceeding against a foreign corporation, non-resident, or foreign state where the action or proceeding arises out of or relates to any contract, agreement or undertaking for which a choice of New York law has been made in whole or in part pursuant to section 5-1401 and which (a) is a contract, agreement or undertaking, contingent or otherwise, in consideration of, or relating to any obligation arising out of a transaction covering in the aggregate, not less than one million dollars, and (b) which contains a provision or provisions whereby such foreign corporation or non-resident agrees to submit to the jurisdiction of the courts of this state

The parties do not dispute that there is a choice of forum clause in the contract, but because it was not signed by Astrazeneca pie, the issue is whether that entity is sufficiently closely related to the signatory, defendant Astrazeneca AB, such that the action may be maintained against it. The general rule under New York law is that parent corporations may not enforce, or have enforced against them, terms of a contract, including forum selection clauses, signed by their separately existing subsidiaries. A nonparty that is closely related to one of the signatories can enforce a forum selection clause. The nonsignatory defendant must have a sufficiently close relationship with the signatory and the dispute to which the forum selection clause applies. A non-party is closely related to a dispute if its interests are completely derivative of and directly related to, if not predicated upon the signatory party’s interests or conduct.

The inquiry is fact-specific, and bare allegations of control are insufficient. For example, in Project Cricket Acquisition, the court dismissed the claims against the non-signatory entities because “plaintiff fails to allege how each of the … Non-Signatory Parties were involved in … this dispute. The general allegations of control are entirely insufficient to disregard the separate legal identities of these corporations. In contrast, in Tate & Lyle, the claims were not dismissed against the nonsignatory entities. There, the court found that they were involved in far more than a parent company’s mere approval of a contract. Rather, the entities not only consulted with each other, but both were intimately involved in the decision making process from the inception of the licensing agreement through this litigation. The signatory entity could not sign the licensing agreement on its own authority; it needed approval from the nonsignatory parent company. The nonsignatory parent also directed the signatory entity to bring the lawsuit. Similarly, in Metro-Goldwyn-Mayer, the court found that the facts alleged provide a sufficient basis to maintain the claims against the nonsignatory despite “the precise corporate relationships between the Defendants remaining unclear at this early stage of the litigation, before any discovery has taken place where the plaintiff alleged that after a merger, the nonsignatory entity was the successor-in-interest under the Agreement, and that the nonsignatory owned a majority of the signatory entity.

Here, granting plaintiff the benefit of every positive inference, the allegations are insufficient to withstand a motion to dismiss. Although Array has alleged that Astrazeneca pie is the signatory entity’s 100% owner and its Board specifically approved the transaction, it did not sign the agreement and had no involvement in the transaction. The court lacks jurisdiction over Astrazeneca plc.

(Internal quotations and citations omitted) (emphasis added).

Commercial litigation involves more than courts. Disputes often are–by agreement–decided by private arbitrators. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have a question regarding a dispute that is subject to an arbitration agreement.